Photo courtesy Worldspectrum on Pexels.
During the past decade, Bitcoin has been a star performer in creating wealth for investors. There are a number of cryptocurrencies that followed Bitcoin and created value, with some disappointing investors. The rise was spectacular even beating the returns of the stock market in many cases. At present both the stock market and the crypto markets are in bear territories having lost their value for the past few months. It is not that the value has come down for the first time in the crypto market. There have been drawdowns before also and Bitcoin has come out stronger in value each time.
Unlike traditional currencies, cryptocurrency is not controlled or regulated by a central bank. The crypto landscape is still evolving and there is an array of regulations around the world. Investors should study all the details before investing in cryprocurrency rather than joining social media groups and losing their hard-earned money. There are some pros and cons of investing in cryptocurrency which is as mentioned below-
1) Ease of transaction-
There is complete ease of transaction and by using a smartphone app or exchange wallet people can send or receive cryptocurrencies. The money invested in the stock market has a time period for transactions but with the availability of cryptocurrency, the person has 24 hours access to money which is throughout the year.
2) Cost-effective and faster transaction-
Cryptocurrency has the lowest transaction cost as it eliminates the need for third-party mediators like Paypal to verify a transaction. The funds’ transfer by wire such as SWIFT is also costlier.
The time taken to process a transaction with cryptocurrencies is very low and when you send money to another country, the blockchain technology completes the transaction quickly. This is because the verification time is very less as there are few barriers to cross. So you can send money anytime and to any location.
The cryptocurrency is decentralized which means that there is a transfer of control from a centralized entity (like a bank) to a distributed network, making it free from national monetary policies. A decentralized currency can act as a stabilizing agent and an alternative. This happens because it gets insulated from bank failures and aggressive bank policies. Payments become borderless and cheap. The only requirement of a decentralized currency is using the wallet and this becomes attractive to the unbanked population. These currencies are also not subject to the exchange rates of different countries.
4) Diversification of risk-
There are many financial assets and cryptocurrency offers diversification in a person’s portfolio. Diversification helps in reducing investment risk. There is market volatility and diversification reduce the impact as the investment is made across asset classes. A diversified portfolio is better as not all the assets will perform poorly at the same time so the time spent on monitoring the portfolio will be reduced. When one instrument is not performing the other will balance it out. A person can invest according to their long-term financial goals. When the total portfolio is spread out across the asset class the investor will not be stressed out and have peace of mind.
The transactions that take place in cryptocurrency are available to anyone who is on the network. The data is recorded on an open ledger using blockchain technology. The address to which the money is sent, the date and time, and the value of the transaction are all tracked except the identities of the people behind the addresses.
6) Quick Gains-
People who have stayed invested in Bitcoin over the last few years would vouch for the wealth it has created. Though there have been bear markets in between, still their wealth has multiplied many times. The same is the case with other cryptocurrencies.
Cons of investing in Cryptocurrency-
1) Highly Volatile-
The concept of cryptocurrency is not very old and it takes time to settle down. It is in the initial stages of price discovery. There is a lot of buying and selling based on sentiment. Trading is very speculative and there is no controlling authority like for the fiat currency. The cryptocurrencies like Bitcoin, Chainlink, and Litecoin have limited supply so the demand and supply forces are always there. Due to limited supply, some big entities can influence the price by buying or selling a large amount of cryptocurrency. Besides this, there is the media hype and all the factors combined together to create a highly volatile crypto market.
2) Illegal activities-
Cryptocurrencies are increasingly being used by criminals just as they are finding favor with investors. There are many illegal areas where it is being used like money laundering, drug trafficking, human trafficking, cybercrime, terror funding, etc. Criminals prefer not to open bank accounts as these institutions have many requirements and restrictions and the government can freeze the account anytime.
In blockchain transactions, the records are accessible to anyone but the identity of the individual making the transaction is unknown. This way terrorists and criminals can get funding without revealing their identities. Cryptocurrency can be transferred from peer to peer without the involvement of a third-party mediator and the transactions are generally at a great speed. The storage of cryptocurrency does not require large space, unlike physical money or bills, so they most likely don’t attract the attention of the authorities and can be transferred easily both locally as well as internationally.
3) Loss Risk-
Cryptocurrencies are stored in a digital wallet and controlled by the person having both public as well as private keys. If the private key is lost or compromised the investor may not be able to gain access to the cryptocurrency held in the digital wallet which will be a big loss. If a third party gains access to the private key then they can gain access to the cryptocurrency.
Since cryptocurrencies are not regulated, there is no recourse when something goes wrong, or there is a technical issue with the wallet and you may not be able to report it to anybody. The digital currency platforms are largely unregulated providing limited transparency on their operations. There have been cases of fraud and security breaches where investors have not been compensated.
4) Power with few Individuals-
The amount of cryptocurrencies in the market is controlled by promoters and a few organizations, who can manipulate the price and take it to a new level. This is true for the lesser-known and newer cryptocurrencies. The investor is not able to report the manipulation as there is no regulatory authority.
5) Huge Energy Consumption-
Bitcoin miners earn coins by solving puzzles using computers. In the earlier days, about a decade back, the miners could use home computers to generate new coins worth a few dollars. But as the market grew, the puzzles became more complex thereby requiring increased computing power and energy. Nowadays Bitcoin mining is very competitive that requires hundreds of high-tech computers operating throughout the day. Bitcoin consumes an estimated 150 terawatt hours of electricity annually which is more than that used by a country like Argentina. Doing this it emits around 65 megatons of carbon dioxide which is a significant contributor to global air pollution and climate change.
Cryptocurrencies have been a creator of wealth for the past few years. The pros and cons of investing in the cryptocurrency have been discussed and the investors can do their own due diligence before investing so that they don’t lose money completely by following some of the tips on social media.